Rackspace profits from cloudy transitions

The OpenStack effect, even before the code went live

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Rackspace Hosting, which co-founded the OpenStack cloud controller effort with NASA two years ago, was bragging last week that it had finally went live with OpenStack on the compute side.

But the funny bit is, as Tuesday's results show, that business has been booming even before it moved to the Essex release of the OpenStack code.

In the second quarter ended in June, Rackspace's revenues rose by 29 per cent, to just a hair under $319m, but net income shot up by 43.1 per cent, to $25.1m. This was despite heavy investment in servers, storage, and software development related to OpenStack and a number of cloudy database, networking, backup, and monitoring services that the company is in the middle of developing for rollouts later this year.

The dedicated cloud business at Rackspace – what used to be called hosting and perhaps it is time to start thinking about dropping the "Hosting" from the name of the San Antonio, Texas firm – is still very large, raking in $246.4m in revenues in Q2, up 20.6 per cent year-on-year and growing steadily on a sequential basis in the five quarters in Rackspace's financial presentation.

Public cloud revenues, which includes both compute and storage services sold under utility pricing as well as load balancing services across cloudy infrastructure, rocketed up 69 per cent, by comparison, to $72.6m. If present conditions persist (and El Reg realizes they won't because the world does not follow straight lines), somewhere around the third quarter of 2015 not only will Rackspace break $1bn a quarter, but its cloud business will be larger than its hosting business.

If OpenStack is as good as Rackspace hopes, and the economics work in favor of both customers and Rackspace alike to move to virtualized server instances and utility pricing instead of dedicated or shared physical machines with monthly or annual rental, then the growth of the cloudy infrastructure cloud take off.

As Cloud Database, Cloud Block Storage, Cloud Archive, and Cloud Networking services get added to the cloudy product lineup alongside Cloud Files and Cloud Servers, there will be incremental revenue here, too, that hastens the day when the company will drop the hosting from its name.

As the June quarter came to a close, Rackspace said that it had 190,958 customers, up 25.2 per cent, and that its server base had grown to 84,978 machines, up only 14.8 per cent. Right there you can see the effect of server virtualization.

Another effect is that the average revenue generated per server in the June 2012 quarter was $1,270, up 11.3 per cent from the $1,141 that a server made, on average, back in the June 2011 quarter.

On a conference call with Wall Street analysts, Lanham Napier, CEO of the company, said that the Cloud Block Storage, Cloud Archiving, and Cloud Monitoring services would ramp in the third quarter, with Cloud Networking (based in large part on various elements of code developed by Nicira, soon to be part of VMware, for the OpenStack project) coming in the fourth quarter.

The Cloud Database service, which is akin to the Amazon's Relational Database Service in that it abstracts and manages a MySQL cluster and sells it as a service, went live last week after being developed and tested for several years.

Napier said that Rackspace was confident that it could hit its rollout targets for the remainder of the year, even as he conceded that the OpenStack rollout for the compute cloud took longer than expected. He also added that he did not expect much in the way of revenue contribution from these services this year.

Rackspace does not provide any particular revenue or earnings guidance, but Karl Pichler, CFO at the company, reiterated that Rackspace was on plan to spend somewhere between $210m to $250m on customer gear for 2012. Pichler added that

Rackspace had also just inked deals to add another 10 megawatts of data center capacity to its operations in the United States, the United Kingdom, and Australia, where it hosts its data centers. The 20 year lease term for this 10 megawatts of capacity has a value of just under $300m. A little less than half of that capacity will go live in January 2013, with the remainder coming online in January 2014.

Rackspace had 58 megawatts of data center capacity under contract as the June quarter ended, up from 38 megawatts a year ago. It had 32.7 megawatts that was available for use and it actually used 22.7 megawatts of that installed capacity. On an annualized basis, that works out to $57,867 per megawatt of power utilized, about 8.3 per cent higher than a year ago in terms of data center efficiency. ®